Examining the Effect of COVID-19 on Foreign Exchange Rate and Stock Market -- An Applied Insight into the Variable Effects of Lockdown on Indian Economy

Banerjee, Indrajit; Kumar, Atul; Bhattacharyya, Rupam

The relationship between a pandemic and the concurrent economy is quite comparable to the relation observed among health and wealth in general. Since 25th March 2020, India has been under a nation-wide lockdown. This work attempts to examine the effect of COVID-19 on the foreign exchange rates and stock market performances of India using secondary data over a span of 48 days. The study explores whether the causal relationships among the growth rate of confirmed cases (GrowthC), exchange rate (GEX) and SENSEX value (GSENSEX) are remaining the same across different pre and post-lockdown phases, attempting to capture any potential changes over time via the Vector Auto Regressive (VAR) models. A positive correlation is found between the growth rate of confirmed cases and the growth rate of exchange rate, and a negative correlation between the growth rate of confirmed cases and the growth rate of SENSEX value. A naive interpretation from this could be that with the rising growth rate of the number of confirmed cases, the economy took a toll, reflected by the Indian currency being depreciated while the stock exchange index suffered from a fall. However, on applying a VAR model, it is observed that an increase in the confirmed COVID-19 cases causes no significant change in the values of the exchange rate and SENSEX index. The result varies if the analysis is split across different time periods - before lockdown, first phase of lockdown and extension of lockdown. To compare the three periods, we had undertaken five rounds of analyses. Nuanced and sensible interpretations of the numeric results indicate significant variability across time in terms of the relation between the variables of interest. This detailed knowledge about the varying patterns of dependence could potentially help the policy makers and investors of India in order to develop their policies to cope up the situation.